Housing market on the road to equilibrium in 2016

Following the sharp upswing at the end of 2015 and the start of 2016, the figures now show a certain trend towards normalisation.

There are still signs of widespread regional imbalances and difficulties accessing credit, which limit both supply and demand.

In 2014 the housing market started recovering after the profound crisis that afflicted it since midway through 2007, deflating the prices of some properties by up to 50% and almost completely paralysing production. In this normalisation process, which is predicted to be a long one (some analysts say that it will take between 15 to 20 years to fully digest all the excesses of the boom), 2016 has been interesting as some of the foundations have been laid upon which the property sector will evolve over the next few years.

Firstly, 2016 could be defined as one of stabilisation after the sharp upswing that, between the end of 2015 and the start of 2016, affected prices, purchase agreements, mortgage signings and the start of new promotions, all the main variables that measure the health of the residential market. This sudden peak even started to ring alarm bells among those who feared the shadow of a new bubble.

But it is clear that since the middle of 2016 the results have started to taper off, justifying the view of those who saw this peak as the typical rebound effect that usually occurs after a prolonged crisis. In any case, and despite the growth of all the variables, experts warn that we should remember the level from which the recovery started to understand how far there is still to go before the market returns to normal.

In this sense, the most significant data may be the construction of new homes. Despite the greater than 30% rise in the concession of new building licences quoted by the Ministry of Development, the year will end with less than 65,000 homes started, way below the 150,000 that, according to most experts, a country like Spain needs. However, Ernesto Tarazona from Knight Frank reminds us, “above and beyond the volume itself, the most interesting thing is that the market corrected itself in 2016 as more homes have been started than were finished”.

Different speeds

Another feature of this year has been the realisation that the market is recovering at very different speeds, at a rate that is heavily influenced by the rise in economic activity and employment in different cities across the country. Thus, over the course of 2016 we have seen how property market activity has become strongly polarised around Madrid and Barcelona, the two main centres for the start of this new cycle, and, to a certain extent, in some enclaves of tourist properties at the Málaga end of the Costa del Sol, Alicante’s Costa Blanca and the Balearic Islands.

Notwithstanding, promoters have also been uncovering pockets of unsatisfied demand owing to a lack of stock in other cities on the outskirts of these two cities as well as some provincial capitals over the course of the last 12 months. In the rest of the country people hear talk of the property recovery as something still a long way off with no signs yet of rising prices let alone even one crane on the h0rizon.

Few promoters

“One of the defining features of the residential market in 2016 has been the return and consolidation of activity in the hands of promoters not belonging to the financial sector. The private promoter has returned to the market, mainly backed by capital from investment funds”, remarks Samuel Población from CBRE.

Despite this being true, it has also become clear this year that only a few operators can take part in this incipient new cycle at the moment. From the classic atomisation of this sector, in which property companies could be counted in their thousands, encouraged by freely available finance during the boom years, the market is now in the hands of less than two dozen companies that are really active on a national level.

A hardening of financial conditions, combined with an aversion to lending money for property development projects, has sidelined hundreds of small promoters, meaning that the only companies that can take part in this first phase of the recovery are those promoters who survived the debacle of the last few years in good health, or new companies that have been created with the backing of foreign capital.

A very constrained market

To fully understand what 2016 meant in the market recovery process, it is also interesting to analyse some of the constraints affecting the demand side and which strongly distort the feeling that things could be going better than they really are.

Along these lines, it is as well to remember that the market is still mainly being driven by replacement home buyers, which means someone who already owns his or her home and is selling it to acquire a better one. The typical profile would be someone who is aged 35 or older, economically solvent and able to access credit. Despite the slow return of bank finance for private buyers, young people are still unable to get a mortgage that would enable them to buy a home.

Along with this demand, is also being strongly driven by two other types of buyer profile: private investors and foreign buyers. The first of these comprises savers who are mobilising their capital into bricks and mortar given the zero returns that, in the current climate of negative interest rates, are offered by alternative investments such as fixed yields, bank deposits or a volatile Stock Market. This would explain the fact that, according to the latest data published by the General Council of Notaries, 59% of property sales are in cash.

The positive side is that this investment in property is not of the speculative nature it was during the previous property cycle, when, as prices were soaring out of control, many individuals were buying flats to sell them on before signing the title deed with profits of up to 20% in barely a year. Now, buyers have a more patrimonial approach and buy to rent, which means that, in the majority of cases, they will renovate the flat at the same time as contributing to increasing the total stock of available rental properties.

With respect to the purchase of homes by non-nationals, we must take into account that almost 20% of transactions recorded by property registries are undertaken by foreigners. This important volume will not only affect overall annual sales, but also prices given that many of these foreigners acquire luxury homes.

Rental consolidation

If 2016 has made one thing clear, it is that the rental sector is going to be a market to be taken seriously in this new cycle. At least this is how it seems based on the strong growth of this sector, which has gone from 7% of the total housing stock to 22.7% in 2015, according to the lastest data published by the INE (some analysts claim that it is already above 25% nationally and much higher than this in Madrid and Barcelona).

According to the experts, this rapid growth in the rental sector reflects a dual reality: the impossibility for young people to secure finance to buy combined with their own aversion to getting into debt. This fact has become so engrained in society that some even believe that we are starting to overcome the deep-rooted popular belief that “to rent is to throw your money away”.

Be that as it may, what is undeniable is that institutional investors have set their sights on a market traditionally in the hands of private individuals or small investors and which is now marching inexorably towards professionalisation. As well as the paradigm shift in demand, the success of the Socimis (Limited Companies Quoted on the Property Exchange), which are very attractive investment vehicles for exploiting the rental business, has been decisive.

As a result, large investment funds are starting to put together and manage significant rental property portfolios in order to satisfy this growing demand. In this context, the most significant event of the year has been the rennaissance of Testa Residencial, the company that emerged after the acquisition of Metrovacesa by the Merlin Socimi. This company has started off with 4,700 properties and will soon have a further 4,000, which will be transferred to them by their major shareholders: Banco Santander, BBVA and Banco Popular.

“We should not be surprised if we soon see companies managing property portfolios of between 40,000 to 50,000 units” predicts one analyst, who goes on to explain that these companies, which operate on a global level, need these volumes in order to be profitable.